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The Housing GSEs


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Presentation to the Univ. of San Diego\'s Burnham-Moore Center on Real Estate

Published in: Economy & Finance, Business
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The Housing GSEs

  1. 1. The Housing GSE’s:The Housing GSE’s: Implications for the 2009Implications for the 2009 Financial MarketsFinancial Markets Specially Prepared for: Burnham-Moores Center for Real Estate, Residential Real Estate Conference: Outlook 2009 Presented by: LaVaughn M. Henry, Ph.D. Director, U.S. Economic Analysis The PMI Group, Inc. December 9, 2008
  2. 2. Presentation OutlinePresentation Outline  The Role and Market Presence of the GSEs  Remedies Proposed to Address the Financial Risk of the GSEs  Re-invention Proposals to Reinvigorate the GSEs
  3. 3. The Role and Market Presence ofThe Role and Market Presence of the GSEsthe GSEs
  4. 4. The Role of the GSEs is to provide liquidity andThe Role of the GSEs is to provide liquidity and stability to the U.S. housing and mortgage markets.stability to the U.S. housing and mortgage markets. Step 1 Banks lend money to Households to purchase and refinance home mortgages Step 2 The GSEs purchase these mortgage from the banks Step 3 GSEs bundle the mortgages into mortgage- backed securities Step 4 GSEs sell mortgage- backed and debt securities to domestic and international capital investors Step 5 Investors pay GSEs for purchase of debt and securities Step 6 GSEs return funds to banks to lend out again for the issuance of new mortgage loans
  5. 5. Partially in response to increased activity of thePartially in response to increased activity of the GSEs, homeownership in the U.S. rose to recordGSEs, homeownership in the U.S. rose to record levels over the last 20 years…levels over the last 20 years…
  6. 6. ……and Expanded the Dream ofand Expanded the Dream of Homeownership to a Much Broader SegmentHomeownership to a Much Broader Segment of American households.of American households. 78.8 48.6 42.6 70.2 42.2 84.6 53.1 49.7 76.2 50.1 83.0 52.0 47.8 75.1 49.5 Greater than Median Family Income Less Than Median Family Income African-American White Hispanic HomeownershipRate 1994Q4 Peak 2008Q3
  7. 7. But the expansion of benefits alsoBut the expansion of benefits also carried expanded costs…carried expanded costs…
  8. 8. ……to reflect the significantly increasingto reflect the significantly increasing amount of risk assumed by the GSEs.amount of risk assumed by the GSEs. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Conv. MortgageHPA %Seriously Delinquent
  9. 9. The GSEs are a Significant andThe GSEs are a Significant and Growing Part of the MortgageGrowing Part of the Mortgage Market…Market… Mortgages in the U.S. Total:$12.1 Trillion Owns Guarantees Guarantees Owns Fannie Mae Freddie Mac
  10. 10. ……whose effect is spread across allwhose effect is spread across all states of the nation.states of the nation. 53.2% CA 62.4% NV 64.0% DC 68.1% NY 68.6% FL 71.4% HI 72.2% CT 72.5% AZ 72.7% MD 73.9% VA 75.3% NJ 77.0% RI 77.3% CO 77.7% MA 79.1% WA 80.0% GA 81.0% OR 81.3% ID 81.6% IL 81.8% TX 82.4% UT 82.7% DE 83.0% SC 83.3% NH 83.5% MN 83.8% ME 84.2% TN 84.4% WY 84.4% MI 84.5% PA 84.9% NM 85.8% NC 86.0% MT 86.4% OH 86.8% LA 87.1% MS 87.6% MO 88.0% VT 88.3% IN 88.4% OK 88.4% AL 89.2% KY 89.4% WV89.5% KS 89.7% WI 89.9% AR 90.0% AK 91.5% NE 92.3% IA 92.8% SD 93.6% ND Less than 75.0% 75.0% to 80.0% 80.0% to 85.0% 85.0% to 90.0% Greater than 90.0% Geographic Distribution of GSE-backed Mortgages
  11. 11. There is a renewed and growing reliance onThere is a renewed and growing reliance on GSE securitization in the mortgage markets…GSE securitization in the mortgage markets…
  12. 12. ……during this period of increasingduring this period of increasing stress in the housing and mortgagestress in the housing and mortgage Home Prices Decline Loss Estimates on MBS Increase Market Price of MBS Declines Write-offs Increase and Capital Declines Lenders Tighten Credit Standards Borrowers Become Less Able to Qualify for Financing Home Sales Decline Due to Drop in Demand
  13. 13. Remedies Proposed to AddressRemedies Proposed to Address the Financial Risk of the GSEsthe Financial Risk of the GSEs
  14. 14. Federal Intervention and ProgramFederal Intervention and Program Announcements Accelerate…Announcements Accelerate… Housing and Economic Recovery Act of 2008Housing and Economic Recovery Act of 2008 July Establishment of Conservatorship by the FHFAEstablishment of Conservatorship by the FHFA September Announcement of Loan Modification & Temporary Foreclosure Moratorium Announcement of Loan Modification & Temporary Foreclosure Moratorium November Announcement of Intended Debt & MBS Purchases by the Federal Reserve Announcement of Intended Debt & MBS Purchases by the Federal Reserve November
  15. 15. Housing and Economic Recovery ActHousing and Economic Recovery Act of 2008of 2008  Highlights  Authorized the Secretary of the Treasury to support the GSEs by purchasing obligations and other securities from the GSEs.  Granted the Secretary broad authority to determine the conditions and amounts of such purchases.  Impact on the Market  Fairly Minimal  Credit Markets continued to tighten FR 30-yr Mtge Apps 12Jul08 6.37 30.40 19Jul08 6.26 -5.40 26Jul08 6.63 -15.50 2Aug08 6.52 0.40 9Aug08 6.52 -3.20 23Aug08 6.47 -2.70 3-mo Sprd 10-yr Sprd Jun 2008 49 75.8 Jul 2008 85.8 78.7 Aug 2008 78 83.1
  16. 16. FHFA establishment ofFHFA establishment of ConservatorshipConservatorship  Highlights  FHFA takes a conservatorship position relative to the GSEs with the purpose of preserving and conserving the GSE’s assets and property and to put the companies on a sound and solid footing.  FHFA agreed to purchase senior preferred stock in the GSEs.  Secretary of Treasury established two special facilities to purchase the securities and debt of the GSEs.  Treasury announces that it has essentially guaranteed Fannie Mae and Freddie Mac securities.  Impact on the Market  Marginal, in the short-run  Significant, in the long-run FR 30-yr Mtge Apps 23Aug08 6.47 -2.70 30Aug08 6.40 3.70 6Sep08 6.35 -8.00 13Sep08 5.93 75.60 20Sep08 5.78 -13.40 27Sep08 6.09 -26.40 3-mo Sprd 10-yr Sprd Aug 2008 78 83.1 Sep 2008 140.3 77.6 Oct 2008 154.3 115.7
  17. 17. Announcement of Loan ModificationsAnnouncement of Loan Modifications & Foreclosure Moratorium& Foreclosure Moratorium  Highlights  November 11 - FHFA Director Lockhart announced a streamlined, uniform loan modification program for qualifying loans of the GSEs  November 20 – The GSEs announced a moratorium on all foreclosure activity until January 9.  Impact on the Market  Too early to call, but may prove significant if done in quantity and the moratorium period is extended sufficiently FR 30-yr Mtge Apps 25Oct08 6.04 33.70 1Nov08 6.46 -26.10 8Nov08 6.20 13.90 15Nov08 6.14 -9.50 22Nov08 6.04 -2.20 29Nov08 5.97 78.60 3-mo Sprd 10-yr Sprd Oct 2008 154.3 115.7 Nov 2008 93.7 152.8
  18. 18. Announcement of Purchase of GSEAnnouncement of Purchase of GSE Debt and MBS by Federal ReserveDebt and MBS by Federal Reserve  Highlights  November 25 – Fed announced its intention to purchase up to $100 billion in GSE direct obligations through a series of competitive auctions.  Fed also announced that it would purchase up to $500 billion in MBS by year-end.  Impact on the Market  Significant in both the short and long run.  Helps to improve the appeal of the GSEs’ debt and remove some of the uncertainty regarding their future prospects. FR 30-yr Mtge Apps 1Nov08 6.46 -26.10 8Nov08 6.20 13.90 15Nov08 6.14 -9.50 22Nov08 6.04 -2.20 29Nov08 5.97 78.60 6Dec08 5.53 3-mo Sprd 10-yr Sprd Oct 2008 154.3 115.7 Nov 2008 93.7 152.8
  19. 19. Re-invention Proposals toRe-invention Proposals to Reinvigorate the GSEsReinvigorate the GSEs
  20. 20. Reinvention of the GSEs will not beReinvention of the GSEs will not be simple…simple…  Broad agreement that the GSEs serve a useful purpose  Substantial disagreement on what the future structure and mission should be  Most common disagreement arises from the reconciliation of the GSEs public mission and its private ownership
  21. 21. Alternative Solutions that have beenAlternative Solutions that have been proposed…proposed…  Post-HERA 2008 and Pre-conservator status: the return of the GSEs to the private sector, with stronger regulation  Public Utility Status – regulated activity and return  FHLB Structure – cooperative based on customers/regional location  Complete Privatization  Nationalization
  22. 22. ConclusionsConclusions  The GSEs have reached the point where a new solution must be reached  Role of the GSEs as a stabilizing element is likely to gain as the housing and financial markets remain in crisis  Unlikely to see full resolution of the housing and mortgage market problem in 2009, pushing the likelihood of a resolution to the GSEs future into 2010